If you have a good investing year and your income is already on the higher side, you can get hit with a surprise add-on tax: the Net Investment Income Tax (NIIT). It is a 3.8% surtax that stacks on top of your regular federal tax and can apply to things like capital gains, dividends, interest, and certain rental income.
In this guide, I will walk you through what counts as net investment income, who pays NIIT in 2026, and how to estimate it with simple, real-world examples.
Quick heads-up: The dollar thresholds in this article are based on current law. They are statutory amounts (not indexed for inflation) but Congress could change them in the future.
What NIIT is (and why it surprises people)
NIIT is a Medicare-related surtax created to help fund healthcare. The key thing to know is that it is not based on your tax bracket directly. Instead, it kicks in when your modified adjusted gross income (MAGI) goes above certain thresholds and you also have net investment income.
For most people, MAGI for NIIT is essentially your AGI, with limited adjustments (most commonly certain foreign earned income addbacks). In other words, there is not a whole separate “mystery MAGI” calculation for most taxpayers.
That means a one-time event like selling a big chunk of stock, getting a large taxable mutual fund distribution, or selling a rental property can push you into NIIT territory even if you do not feel wealthy.
What counts as net investment income
Net investment income (NII) is generally your investment and passive income minus certain directly related expenses. For most everyday investors, think of it as “generally taxable portfolio and passive income” that is not tied to your active work.
Two quick nuances: Capital losses can offset capital gains (which can reduce NII), and after the TCJA, many common investment expenses are not currently deductible for individuals, so the “minus expenses” part is often smaller than people expect.
Common types of income included in NII
- Capital gains (both long-term and short-term), including gains from selling stocks, ETFs, mutual funds, and often second homes and investment property
- Dividends (qualified and ordinary)
- Taxable interest (like bank interest, CDs, and most bond interest)
- Rental income when it is treated as passive (generally when you do not materially participate). If your rental activity rises to a trade or business and you materially participate, it may be excluded from NII, and grouping elections can matter.
- Royalties
- Non-qualified annuity income
- Income from businesses you do not materially participate in (passive activity income)
Common items usually not included in NII
- Wages and self-employment income (these are earned income, not investment income, though they can raise your MAGI)
- Social Security (it can affect AGI/MAGI, but it is not typically net investment income itself)
- Distributions from qualified retirement accounts like a 401(k) or traditional IRA (generally not NII, but they can increase AGI/MAGI)
- Roth IRA qualified distributions (generally not NII and typically not included in AGI/MAGI)
- Interest from municipal bonds (generally excluded from NII and generally does not increase AGI/MAGI for NIIT purposes)
Side note: Some municipal bond interest (such as interest from certain private activity bonds) can be relevant for AMT in some cases. That is a separate topic from NIIT, but it is a common point of confusion.
Important: The NIIT rules have details and exceptions, especially around real estate, passive activity rules, trusts and estates, and business income. When the dollars are large, it is worth confirming with a tax pro.
Who pays the 3.8% NIIT in 2026
For most individuals, NIIT applies if both of these are true:
- Your MAGI (usually AGI) is above the NIIT threshold for your filing status.
- You have net investment income.
MAGI thresholds (current-law NIIT thresholds)
- Single: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Head of household: $200,000
These NIIT thresholds are not indexed for inflation in the way many other tax figures are, so they can feel more reachable over time as incomes rise.
Trusts and estates: NIIT can also apply to trusts and estates, and the income level where it kicks in is typically much lower than the individual thresholds.
How the NIIT is calculated (plain English)
NIIT is 3.8% of the smaller of these two numbers:
- Your net investment income
- Your MAGI above the threshold for your filing status
That “smaller of the two” rule is a big deal. It is the reason some people only pay NIIT on part of their capital gains, not all of it.
Tax form note: NIIT is calculated on Form 8960 and then flows onto your return.
Simple NIIT calculation examples
Example 1: Single filer with a stock sale
Facts:
- Filing status: Single
- MAGI in 2026: $230,000
- Net investment income: $50,000 (capital gains and dividends)
- NIIT threshold: $200,000
Step 1: MAGI over threshold = $230,000 minus $200,000 = $30,000
Step 2: Smaller of NII ($50,000) or over-threshold amount ($30,000) is $30,000
NIIT: 3.8% of $30,000 = $1,140
Notice what happened: even though investment income was $50,000, NIIT only applied to $30,000 because income was only $30,000 above the threshold.
Example 2: Married filing jointly with dividends and interest
Facts:
- Filing status: Married filing jointly
- MAGI in 2026: $310,000
- Net investment income: $18,000 (dividends + taxable interest)
- NIIT threshold: $250,000
Step 1: MAGI over threshold = $310,000 minus $250,000 = $60,000
Step 2: Smaller of NII ($18,000) or over-threshold amount ($60,000) is $18,000
NIIT: 3.8% of $18,000 = $684
Example 3: Rental income pushes you over
Facts:
- Filing status: Single
- MAGI in 2026: $205,000
- Net investment income: $12,000 (net rental income treated as passive)
- NIIT threshold: $200,000
Step 1: MAGI over threshold = $5,000
Step 2: Smaller of $12,000 or $5,000 is $5,000
NIIT: 3.8% of $5,000 = $190
How NIIT stacks with capital gains tax
NIIT is a surtax. It stacks on top of whatever tax rate already applies to your investment income.
- Long-term capital gains: You may owe long-term capital gains tax plus NIIT (if you are over the threshold).
- Short-term capital gains: These are taxed like ordinary income, and you may owe that ordinary rate plus NIIT.
- Dividends: Qualified dividends may get favorable rates, but NIIT can still apply on top.
- Interest: Taxable interest can face ordinary income tax rates, and NIIT can stack on top.
NIIT is not a replacement for capital gains tax. Think of it like an extra 3.8 cents on the dollar on certain investment income once your MAGI clears the threshold.
Special callouts people miss
Home sales
If you sell a primary residence, the home sale exclusion under Section 121 may shelter some or all of the gain. For NIIT, only the taxable portion of a home sale gain flows into your investment income calculations. Second homes and investment property do not get the same exclusion treatment.
Losses reduce gains
If you have capital losses, they can offset capital gains. Since capital gains are a major NIIT driver, losses can reduce NII (and potentially NIIT), depending on your overall situation.
Planning notes to reduce or manage NIIT
I am a big fan of planning moves that are simple, legal, and do not require you to live on rice and beans. These are the NIIT levers that come up most often.
1) Time your gains (especially at year-end)
Because NIIT depends on your annual MAGI, timing matters.
- If you are hovering near the threshold, delaying a sale into January can sometimes move the gain into the next tax year.
- If you had an unusually low-income year, harvesting gains (selling appreciated assets and rebuying) may reduce NIIT exposure.
- Watch mutual fund capital gain distributions, which can show up even if you did not sell the fund.
2) Use municipal bonds for some fixed income
Municipal bond interest is often excluded from federal income tax and is generally excluded from net investment income. It also generally does not increase AGI or MAGI for NIIT purposes. For some higher-income investors, swapping part of a taxable bond allocation into munis can reduce both regular tax and NIIT exposure.
This is not a universal win. Yields, credit risk, state tax rules, and your time horizon matter. But it is a legit planning tool, especially in taxable brokerage accounts.
3) Be strategic about Roth conversions
A Roth conversion increases your income in the year you do it. That extra income is not net investment income, but it can raise your MAGI enough to trigger NIIT on your investments.
- If you are planning a conversion, consider spreading it over multiple years to stay under the NIIT threshold.
- In a year you are selling assets or realizing big gains, adding a large conversion can be a double hit.
4) Look at asset location (what you hold where)
NIIT only matters in accounts where the income is taxable. A basic “asset location” approach can help:
- Keep tax-inefficient assets (like taxable bond funds) in tax-advantaged accounts when possible.
- Use your taxable brokerage for more tax-efficient holdings (like broad index funds) when it fits your plan.
5) Real estate: know whether your rental is passive
Many landlords are surprised to learn rental profit can be considered net investment income if it is passive. If you are near the NIIT line, it is worth understanding whether you materially participate, whether you qualify as a real estate professional, and how depreciation and expenses affect net rental income.
Quick NIIT checklist
- Add up expected investment income for the year: gains (net of losses), dividends, interest, and net rental profit.
- Estimate your AGI and any NIIT-specific MAGI adjustments (for most people, MAGI is essentially AGI) and compare it to your filing status threshold.
- NIIT applies at 3.8% to the smaller of (a) net investment income or (b) MAGI above the threshold.
- If you are close to the line, timing a sale, using municipal bonds, or pacing Roth conversions can make a noticeable difference.
Personal note: If NIIT is on your radar, you are probably doing a lot of things right financially. The goal is not to avoid success. It is to avoid avoidable surprises by planning your big moves with the surtax in mind.
Important tax note
This article is for general education, not individualized tax advice. NIIT gets especially nuanced with trusts, estates, passive activity rules, real estate professional status, grouping elections, and business income. If you are realizing large gains, selling real estate, or doing major Roth conversions, consider running projections with a qualified tax professional.